Bought and Paid For (13 page)

But by the middle of the year he didn't have much choice; rates kept rising, and the investment pool was now in serious condition, and so was the county's budget, which was losing hundreds of millions of dollars to satisfy the collateral demands of the Wall Street dealers who had once been Bob Citron's best friends but were now the single largest reason the county was in dire straits. The losses were soon insurmountable, and on December 6, 1994, Orange County, one of the nation's richest counties as measured by its per capita income, declared bankruptcy.

The bankruptcy filing led the way for huge budget cutbacks, particularly for the 187 school districts that had money invested in Citron's fund. Of course, Orange County's pain was Wall Street's gain. According to the
New York Times
, between 1993 and 1994 Orange County bought nearly $6.3 billion in derivatives from Merrill Lynch, transactions that generated nearly $100 million in commissions for the firm.

The bankruptcy set off a series of lawsuits. Citron would plead guilty to six felony counts. The
Los Angeles Times
described his misdeeds: “misappropriating public funds, falsifying documents and misleading nearly 200 government agencies that trusted him to invest their money.” Because of his guilty plea (a surprise, as he at first stated he would fight the charges in court), Citron spent just a year in jail.

Merrill got off relatively cheaply.

“They're getting off completely. It's a joke,” said an official at the Securities and Exchange Commission, embarrassed and outraged by the settlement the SEC had reached with Merrill over its dealings with the county.

When he said those words to me, four years had passed since Orange County's bankruptcy; it was now 1998, and Wall Street was leading the nation in an economic renaissance, or so the Clinton administration liked to say. New cutting-edge companies that were supposed to make money off the Internet were coming to market every day; stocks were on a roll, and not just those in the stodgy S&P 500 index of the “old” economy. These were the stocks of the dot-com rage, and they were making Middle Americans rich, people who for the first time began buying individual technology stocks based on research reports by Merrill Lynch's Henry Blodget or Jack Grubman of Citigroup, many of them touted on the business news channel CNBC.

As for Merrill's dealings with Orange County? Investigators working on the case, according to an SEC official, wanted Merrill to suffer in a big way, possibly with a fraud charge and a large fine. But Merrill hired a team of sophisticated and—more important—politically connected attorneys who argued that it was Citron who had been hooked on risk and that it was
his
decision to roll the dice. Merrill merely supplied the heroin, which he could have gotten from any other firm.

It's hard to imagine a drug dealer getting off with a slap on the wrist with that defense, but much to the chagrin of the investigators on the case, that's exactly what happened. Senior SEC officials succumbed to Merrill's pressure, and a settlement was crafted that left much of the SEC staff, and those reporters still covering the case, including me, stunned.

Merrill had already settled with local prosecutors, thus escaping criminal charges that would have shuttered the firm more than a decade before its 2008 collapse, by paying a large but manageable $470 million to settle civil and criminal litigation into its role in the bankruptcy. The Securities and Exchange Commission demanded just $2 million to end its investigation. There were no individual charges (Stamenson got to keep his job at Merrill). And in neither case did Merrill have to admit to wrongdoing, even though its actions had helped convert Orange County's municipal finance department into a casino and led to the largest municipal bankruptcy in U.S. history.

As Greece does today, Bob Citron and Orange County nearly twenty years ago exemplified what can go wrong when Wall Street high finance is used to mask the reality of runaway government. Part of Merrill's defense that appeared to resonate with its primary regulators at the SEC was that it merely served as a middleman for Citron and had no responsibility to stop him from carrying out his scheme, while Citron himself attempted, in turn, to tap into the growing anger over Wall Street's indifference to the scandal. He claimed to be an “unsophisticated investor” who was largely duped by the smart Wall Street crowd.

Stamenson, of course, disputed that account, describing Citron as a “highly sophisticated investor.” While Citron had only visited Wall Street four times in his life, he had known all the big dealers well, including the salesmen who peddled bonds.

Orange County and its taxpayers, meanwhile, were the ones who suffered the most; had their government not gambled away their money, they might not have had the decades of lavish spending that they did, but they wouldn't have the dire collapse, either. Sound familiar?

One thing neither side can dispute is how the Orange County bankruptcy displays in vivid detail the symbiotic relationship between Wall Street and Big Government, and all its disastrous effects. Stamenson had donated $4,000 to Citron's successful reelection campaign, which helped ensure that the investment strategy would continue. He also would actually write Citron's talking points for him when the treasurer made presentations about his management of the pools to Orange County's board of supervisors.

But despite the enormous cost to taxpayers, Orange County marked the beginning, not the end, of risk taking in the municipal market. The reason? Well despite the magnitude of the implosion—at their height the pools were valued as high as $8 billion—both government and Wall Street got off pretty easily.

As a result, the market for financial products used by Robert Citron to keep his Big Government alive (for a time) continued to flourish, and Wall Street, like a dope pusher living on Park Avenue, couldn't have been happier.

“W
here's Sandy, where's Sandy?” Reverend Jesse Jackson nervously asked. He was huddled with some key advisers in a rather unusual setting for the controversial civil rights activist: a reception held inside the headquarters of Travelers Group, the massive brokerage and trading empire run by financier Sandy Weill.

The year was 1997 and the reception was being held to commemorate Jackson's new civil rights organization, the Wall Street Project. But there was much more at stake—for both Jackson and Weill—than the seemingly simple goal of Jackson's group to create more diversity in the financial services industry.

Weill wasn't content with merely running a firm like Travelers, which combined selling insurance to consumers with peddling stocks and bonds to small investors through a brokerage unit, and of course doing its own trading and deal making.

He had his eye set on creating the world's ultimate “financial supermarket” by purchasing a large commercial bank and merging it with Travelers. Weill's vision was to combine commercial banking, including customer deposits, with the risk-taking trading activities found at Wall Street firms like Goldman Sachs and Morgan Stanley. The profits would be huge, he predicted, because clients would shop at one place for all their banking and investment needs.

But he faced formidable obstacles in creating his dream, which a few years later would turn into the nightmare named Citigroup. Under the Glass-Steagall Act, a deal of this nature would create something that was in violation of the law. To forge ahead with his plan, Weill would have to spend a few million dollars on lobbyists to get the law repealed once and for all.

An even bigger challenge would be more political than financial: the government's housing advocates, people like Congresswoman Maxine Waters and others, who would view the potential merger as an opportunity to demand major concessions from the company in exchange for their vote of approval. They would protest, hold hearings showing alleged racial disparity in lending practices, and force Congress to think twice before allowing the merger—unless Weill's banking empire stepped up its lending to poor communities.

But Sandy Weill had an answer to that as well: Jesse Jackson. The famed civil rights activist wasn't above demanding that banks give more loans to the poor, even if the poor couldn't repay them. Indeed, he had been using his stature inside Big Government, his access to key lawmakers, and now his friend President Bill Clinton to achieve his political and financial goals for years. Lately, he had developed a simple but lucrative new business model wherein he would threaten protests of the lack of diversity of various corporations, including, now, the big Wall Street firms. He labeled this latest campaign the Wall Street Project, whose purpose was to bring greater diversity to the nearly all-white and all-male power structure at the typical Wall Street firm. Jackson told me those firms that donated money to his new Wall Street Project were simply demonstrating their commitment to diversity. The firms that gave called the money the price of doing business and, in a rare moment of candor, a form of extortion.

Jackson's Wall Street Project had very little practical effect on the diversity of Wall Street—women and minorities remain largely absent from the senior ranks of the big firms. But the focus on Wall Street helped his organization reap many benefits. For the five or six years the Wall Street Project existed, the money from the banks to his various groups soared. “Blood money,” is how one senior Wall Street executive described the donations. It's easy to understand why Jesse Jackson had his eyes set squarely on Wall Street's blood money, with its vast riches from the 1990s stock market boom, its nearly all-white-male executive ranks, and its movement toward political correctness. The big Wall Street firms and banks that were feasting off the Internet bubble—selling stocks of dot-com companies (many of them eventually worthless) to small investors—as well as the Big Government—earning fees through selling its bonds to finance the nanny state, through municipal financing projects, and through the lucrative debt that an expansive housing policy creates—had found that those profits came at a price: the embrace of contemporary liberalism.

Jimmy Cayne, the CEO of Bear Stearns, used to joke about how he could avoid an extended conversation with Jackson during the glory years of the Wall Street Project. “Rev. Jackson, I'm such a fan of yours,” Cayne said he'd told Jackson. “But the only money I can give you is from the Bear Stearns Charitable Foundation.” The foundation had it own executive director and management, so, as Cayne explained, the firm wasn't the target of a shakedown; its foundation was.

Jimmy Cayne may have dodged the bullet of having to deal directly with Jesse Jackson (Bear Stearns actually financed a minority-owned brokerage that donated significant sums of money to the Wall Street Project and benefited from Jackson's push to force corporations to hire minority-owned brokerages as underwriters), but nearly every major firm had tagged diversity as a primary goal. Firms like Merrill, for instance, even encouraged gender- and race-based groups and clubs inside the firm, even if the senior ranks of the firms remained all white and largely male.

All of this created a tremendous business opportunity for Jackson. He would scare the daylights out of Wall Street by showing how it violated not just its own diversity goals but also civil rights laws, unless, of course, the big firms made him rich (he was already a millionaire) by donating to his organization and by making sure that minority-owned firms that were part of the Wall Street Project gained access to the Big Government largesse that usually flowed only to the big firms, namely lucrative municipal bond contracts and other forms of corporate welfare.

Weill's idea was simple yet ingenious: Instead of fighting Jackson, he would partner with him. He would lend Jackson his name, his offices in Midtown and around the city, and one of Travelers Group's lawyers, Harold Levy (who went on to become New York City schools chancellor), to raise money for Jackson's Wall Street Project, which was supposed to promote diversity on Wall Street but did little more than promote Jesse Jackson. Weill would enlist his friends in the effort, including New York Stock Exchange CEO and chairman Richard Grasso, who gave Jackson and his civil rights group access to the famed floor of the NYSE to hold fund-raisers and access to his Rolodex of millionaires.

And according to people who worked with Weill at the time, he would and did buy off Jackson with events like this one, held inside Travelers' luxurious headquarters in Midtown Manhattan.

It was a pretty odd scene. Corporate executives are usually the ones seeking out and kissing up to Jackson, fearing that they might be the next target of one of his patented shakedowns. But here was Jesse Jackson, an imposing figure in his own right, nervously waiting for the arrival of a short, overweight, and balding investment-banking chieftain.

When Weill arrived at the event, he was surrounded by aides and a bodyguard. He shook some hands before making his way to Jackson, who promptly hugged him and thanked him for all his help. Weill thanked Jackson as well, and with good reason: Within the next year, Weill would purchase banking giant Citicorp and merge it with Travelers to create Citigroup, and he would enlist Jackson to keep his mouth shut about the firm's poor record in lending to minority communities and its near lily white management team and, equally important, to persuade friends in Washington to support the death of Glass-Steagall.